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Magicjack: Buy On Weakness As New Products Having Strong Demand

(By Mani) Shares of magicJack VocalTec Ltd. (NASDAQ: CALL) was under considerable pressure Wednesday as it fell 12 percent after a report that called into question the company's disclosures, accounting, governance practices, and fundamentals.

Though these concerns seem to be backward-looking, they may linger until the new CEO, Gerald Vento, updates the Street on the company's strategy and the new magicJack is launched in April.

Netanya, Israel-based magicJack provides voice over Internet protocol (VoIP) services in the United States. It offers magicJack and magicJack PLUS, which are VoIP devices that provide phone services for home and enterprise customers, as well as in traveling.

The company also offers magicJack PC, a softphone that allows users to make and receive telephone calls through the computer using a headphone or the computer s speakers and microphone; and magicJack APP, an application, which allows users to make and receive telephone calls through their smart phones using magicJack account.

"We met with the new CEO on Friday and believe that he will completely restructure the company and should have a much more extensive game plan on its 4Q12 earnings call in late February," Oppenheimer analyst Timothy Horan said in a client note.

Vento is expected to beef up the management team, end its put option buyback program, and greatly improve/simplify the company's governance and disclosures.

Despite the concerns in yesterday's reports, the company's products and services remain in demand for an expanding niche of service providers. The company has over 3 million regular users of its services through its Jacks and has had over 10 million downloads of its smartphone applications.

Notwithstanding the stock volatility this year, the company did generate strong revenue growth of 31 percent while keeping operating expenses well contained.

The unique ability of the company to use the public Internet to provision reasonable quality voice services is the key to its low cost of operations, and this has improved with recent access charge agreements.

As a result, the company generated $25 million of free cash flow in both 2011 and 2012, which enabled it to buyback 15 percent of shares outstanding.

"We expect that the new WiFi magicJack, smartphone applications and future cordless wireless phones will be very well received by customers. However, the new WiFi device has been delayed until April (we had anticipated a September launch), and we expect the stock to languish until then and until we see the CEO's improvements to operations," Horan said.

"We expect cash sales to be relatively anemic in 4Q12 and 1Q13, and for 2Q13 to see margins compressed, but we should see an acceleration of revenue growth and margins into YE13 and 2014," Horan added.

Moreover, the company seems brought in a new CEO and a new chairman Don Burns to oversee product development, marketing and corporate governance. Both executives are professional managers with extensive communications experience.

A lingering question will be the outgoing CEO's role in the new company and his ability to trade the stock or derivatives on his own and through his newly created trust.

"We would expect the new CEO to provide more clarity on Mr. Borislow's role in the new company, but any perceived conflicts of interest could keep the stock volatile," Horan said.

iStock believes that the ongoing concerns would be temporary, and strong demand for new products should boost fundamentals and stock price.

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